How do you cut (another) £10bn from welfare?
One intriguing part of today's budget was something the Chancellor only hinted at. The next spending review will look to cut £10bn off the welfare budget. But how?
Today’s budget was probably the most leaked in living memory. We knew, for instance, that the 50p rate would be cut to 45p. We knew this would be paid for by levying property taxes on the wealthy. We knew there would be some announcement on regional pay deals for the public sector .We knew the personal allowance would rise to lift some of the lowest paid out of income tax altogether.
What we did not know was that the Chancellor was planning to cut the welfare bill by a further £10bn. And it won’t be clear until the autumn how he intends to do it.
That’s in addition to the £18bn of cuts already announced. This £18bn includes, for instance, the introduction of the benefit cap, the removal of working tax credit to families working under 24 hours a week, the change in benefit uprating from RPI to CPI, the increase in the tax credit taper, the abolition of the 50+ element of Working Tax Credit (WTC), the resetting of Local Housing Allowance rates from the 50th to 30th percentile and the cut in the childcare element of WTC.
The Chancellor could point out that welfare bill is around £200bn and has grown rapidly in recent years. But the “welfare” budget covers far more than just out of work benefits. The graph below, from last year’s Monitoring Poverty and Social Exclusion report, shows how it breaks down and how it changed in the previous decade. The figures show the position before any cuts introduced by the coalition.
By far the largest single component is pensioner income, largely the state pension and pension credit. Together they accounted for 43% of expenditure in 2011, some £87bn, growing by £18bn in ten years. Family benefits, which include tax credits and income support for lone parents, were £41bn in 2011. In contrast, unemployment benefits accounted for only £5bn in total. It’s also worth noting that the amount of money spent on incapacity, disability and injury benefits grew relatively slowly.
Clearly it is debatable whether the state pension can justifiably be referred to as “welfare”, but when the disability and housing benefits received are included, pensioners received just over half of the total welfare spend (£104bn).
So a £10bn cut to the welfare bill could mean two things. It could include benefits paid to pensioners. If today’s changes to age related tax allowances indicate a willingness to consider cutting pensioner benefits, then the ensuing controversy around the “granny tax” show how difficult it is politically. If the £10bn cut does not include pensioners then the cuts to working age adults and children will be even more severe.
Looking at the graph above, two areas appear particularly vulnerable. One is child tax credits, responsible for much of the rise in the family benefits figure, and not much loved by the coalition. The other is housing benefit, already capped in previous spending reviews. What is notable about both is that they are paid to working families as well as workless ones. Welfare tends to be presented as something paid to workless people only, but a £10bn cut in tax credits or housing benefits would hit the working poor as well.